Brexit: The Day We Entered the Eye of the Maelstrom

By Thomas Palley

In years to come, the Brexit referendum may come to be seen as the day we entered the eye of the maelstrom that now promises enormous destruction. The immediate consequence looks to be a possible financial crisis, but even if that is avoided the other costs of Brexit will not be.

The European economy was already on the outer circle of the maelstrom. Brexit has swept it into the eye, accelerating the process whereby social alienation and bad economic outcomes produce bad political outcomes, and bad political outcomes produce worsened economic outcomes and further social alienation.

Economic implications

The leading edge of events will be financial markets. Even if an immediate financial bloodbath is contained, the reasonable expectation is for significant downside turbulence over the coming months that will ripple into the real economy. Moreover, a bloodbath now would not be panic. Instead, it can be rationally justified by the economic and political outlook and the fact that asset markets were already richly valued.

British financial markets and the British economy will be the epicenter. The shock to London’s stock market will hit wealth and household confidence, negatively impacting consumer spending and the United Kingdom (UK) real economy.

Britain’s real estate market (especially London) was already highly priced, and it is now very vulnerable to reduced local and foreign buying. British banks are financed in sterling and a lower sterling exchange rate has unpredictable negative implications for them and their counter-parties.

Business will cut back further on investment in the UK because business dislikes uncertainty. Big ticket investments will be placed on hold until the status of the UK’s access to European markets is clarified.

All these impacts will ramify outward, hitting other economies, including the US. The mechanisms are financial contagion, currency turbulence, and uncertainty, all of which generate negative aggregate demand effects that are then multiplied via the contraction process. The first port of call will be European economy, which is already in a fragile condition and is most integrated with the UK.

Political implications

Bad as the economic news is, the political shocks to come may be worse.

The Brexit electoral outcome map shows all of Scotland voted to remain. That means the UK’s constitutional crisis regarding Scottish independence is likely back on.

In Spain, there is the long-standing issue of Catalonia’s demand for independence, which Brexit further mainstreams and encourages. Now, Italy’s Northern League, which is politically powerful in the rich northern half of the country, is calling for an EU exit referendum.

In effect, Brexit is a green flag for separatisms of all stripe. That has adverse implications for the euro, which is already under the threat of Grexit. Consequently, sterling’s weakness stands to be accompanied by a weakening of the euro, providing an additional currency channel for spreading Brexit’s shockwaves into the global economy.

With regard to US politics, negative economic fall-out from Brexit will injure the incumbent candidate Hillary Clinton and benefit Donald Trump.

Beyond that, Brexit carries vital political lessons for the Obama administration and Clinton campaign, both of which must not give reason for US voters to further disdain the establishment.

Brexit has structural similarities with Trump’s rise. It is the logical outcome of the Conservative Party’s political strategy of the past twenty years. Conservatives used the European Union (EU) as a whipping boy to help smuggle in their “Thatcher – Reagan” neoliberal economic policies. The Labor Party spoke out in defense of minorities, but it did not defend the EU and nor did it adequately confront neoliberalism.

In the US, Trump is the analogue “exit” candidate. His rise is the logical outcome of thirty years, during which Republicans used dog-whistle racism and the culture war to smuggle through their neoliberal economic agenda that has wrought the destruction of shared prosperity. Democrats resisted racism and the culture war, but were complicit in the promotion of neoliberalism.

The lesson for the Clinton campaign is it must move beyond rhetoric criticizing neoliberalism and adopt serious remedies that tackle its legacy of inequality, economic insecurity and loss of hope. Neoliberalism is the ultimate cause of the establishment’s rejection. Racism, immigration and nationalism may be the match for the anti-establishment fire: wage stagnation and off-shoring of jobs are the fuel.

As regards the Obama administration, the lesson concerns the Trans-Pacific Partnership (TPP). On all sides, the US electorate has rejected the TPP, but the Obama administration keeps pushing it. That further discredits the establishment and benefits Trump who is the outsider candidate. Clinton is the insider who has openly touted her links to President Obama, and she still lacks credibility on her opposition to TPP because of her past endorsement.

In this environment, the Obama administration’s pushing of the TPP is recklessly irresponsible politics that send us nose down, into the eye of the maelstrom.

Dead Empires: How China May Overtake the U.S.

By Polly Cleveland

“The earth is the tomb of dead empires, no less than of dead men.” Thus wrote the American economist and journalist Henry George in his 1879 worldwide bestseller, Progress and Poverty. Adam Smith had identified cooperation and specialization—“the division of labor”—as the forces that generated economic growth and prosperity. George claimed that those same forces led eventually to collapse, as monopolization of land and other natural resources directed more and more wealth into ever fewer hands. (George was nonetheless an optimist; he argued for heavy taxes on wealth and checks on monopoly—causes vigorously taken up by Progressive reformers in the early twentieth century.)

When George first wrote, the sun never set on Queen Victoria’s Empire, and looked like it never would. Yet twenty years later the British Empire was visibly faltering, plagued by bankruptcies of investments in U.S. railroads, the failure of obsolete industries, and the quagmire Boer War in South Africa. New rivals—the United States, Germany, and Russia—peered over the horizon.

Two astute observers have recently offered complementary predictions of the imminent demise of the American empire, and its replacement by China. One is historian Alfred McCoy of the University of Wisconsin, and the other is investigative journalist Barry Lynn of New America.

In The Geopolitics of American Global Decline: Washington Versus China in the Twenty-First Century, McCoy describes the Chinese strategy to break through the encircling ring of American bases to reach—and control—its markets and resources directly. As U.S. officialdom has already noted with some alarm, China is aggressively seeking to assert dominion over the South China Sea between it and Japan and the Philippines. It has been dredging landfill to create airbases on the unoccupied Spratley Islands, and has demanded that U.S. and other aircraft overflying the area obtain Chinese permission. But that’s just the eastern end. McCoy presents maps showing China’s massive investments in infrastructure to link it westward overland to the rest of the great Eurasian heartland. While U.S. railroads and bridges crumble, the Chinese are building a dense internal network of sophisticated high-speed high-volume railroads, plus oil and gas pipelines. These will connect up with transcontinental railways and pipelines, crossing Kazakhstan, reaching Moscow, and from there to Hamburg, Germany on the Baltic Sea. Another corridor will connect through Pakistan to the Arabian Sea, and yet another across Myanmar to the Indian Ocean. Meanwhile, the Chinese are making huge collaborative investments with these neighbors and with willing partners in Africa and Latin America. McCoy sees the TPP as Obama’s last-ditch effort to contain China.

For years, Barry Lynn has reported on the growing power—and weakness—of multinational monopolies. The power is more obvious: higher prices, less choice, less innovation—and greater political influence. The weakness is less obvious: less investment, fewer jobs, lower wages, and restriction of manufacturing to dependence on a small number of cheap, mostly foreign suppliers.

Here’s where China comes in, as Lynn reports in The New China Syndrome: American business meets its new master. Multinational businesses, like the auto companies and computer companies, increasingly depend on China both for cheap manufacturing and for access to the growing Chinese consumer market. Lynn reports a number of instances where Chinese have intimidated multinationals into concessions on price, or ownership shares, or jobs for children of Chinese leaders. He describes an episode in which bureaucrats summoned in-house lawyers from some thirty companies, including GE, IBM, Intel, Microsoft, Siemens, and Samsung, told them that half the companies were under investigation for monopoly crimes—without saying which—and  instructed them write public “self-criticisms” under threat of double or triple fines should they refuse. The great monopolies must submit to this arbitrary tyranny precisely because they have destroyed so many other sources of supply, and have so eroded consumer markets in the rest of the world.

Bill Clinton saw U.S. investment in China as a way to “a more open and free China.” What if, Lynn asks, “the extreme economic interdependence between the United States and China is not actually carrying our values into a backward and benighted realm, but accomplishing precisely the opposite — granting the Chinese Politburo ever-increasing leverage over America’s economic and political life?” And, one might add, leverage over all the other multinational host countries? That could hardly have been more obvious than in the obsequious reception given to President Xi Jinping on his recent state visit to Great Britain. The meeting sealed a series of business investments, including a deal in which Chinese investors take a one-third stake in Hinkley Point C, Great Britain’s first new nuclear plant in a generation.

So, on the one hand, as Alfred McCoy suggests, Chinese infrastructure investment and joint ventures in foreign countries increasingly constrain U.S. power from the outside. On the other, as Barry Lynn suggests, Chinese control of multinational corporations threatens U.S. power from the inside. After the British Empire collapsed in the bloodbath of World War I, it staggered on a few more years as a zombie agent of the growing American empire. (See Middle East.) That empire may in turn stagger on as the zombie agent, not of a western democracy, but of a giant nation contemptuous of our values—and with thousands of years’ experience managing empires.